Author Topic: Case Study - Peek inside our $285k budget & laugh at our novice $ skills  (Read 1962 times)

Fi365

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We're a 33-year-old mechanic, 32-year-old consultant, and 2-year-old daughter. Like most "normal" millennials, we spent freely during our 20s. We thought we were doing fine by living slightly below our means. We didn't take on student debt or car loans, put a couple bucks into our retirement accounts, and patted ourselves on the back for a mediocre job well done.

In 2014, in our late 20s, we discovered Pete the Planner and made our first budget EVER.

In 2015 and 2016, we continued budgeting, started actually putting money into retirement, and I turned my side hustle into a full-time LLC.

In 2017, our income kept growing SO unexpectedly--from $112,000 in 2014 to $285,000 in 2017--that we had to figure out how to manage it even better. We discovered Dave Ramsey, the Mad Fientist, MMM, and JL Collins. We're upping our game!

Here's the rundown on our numbers. Scroll to the bottom to see our detailed spreadsheet and offer ideas for improvement.

EARNED $285,000 GROSS AND $180,000 NET

We earned $285,352 during 2017. We live ~50 miles outside of Washington, DC, so the cost of living is still fairly high–our modest townhouse cost $348,000. We probably make significantly more money than most of our neighbors, but we spend significantly less–the perfect equation for FI!

Of that $285,352 gross income, we paid $84,778 in taxes, $16,000 in self-employment business expenses, and $4,300 in healthcare, for a take-home pay of $180,274.

SPENT $102,000 ON MORTGAGES, DAYCARE, FOOD, AND OTHER STUFF

Of the $179,157 net income, we spent $17,065 on our rental condo, $25,203 on our townhouse, $10,907 on part-time daycare, and $49,403 on other household expenses (food, clothes, vacations, furniture, utilities, etc.), which left a “surplus” of $77,556.

(The condo also brings in money, which contributes to the gross and net income mentioned above. We have to keep the rental condo’s income and expenses separate on our taxes, so we mentally keep it separate, too.)

SAVED AND INVESTED $77,000

Of the “surplus” $77,556 we invested $30,500 for retirement, saved $3,650 in a college savings plan, contributed $19,533 extra towards our mortgages, and added $23,873 to our boring old savings account.

OUR NET WORTH: $337,000

Our accounts fluctuate each day, so here’s roughly what we’ve got.

ASSETS
Boring old savings account: $107,000
College savings plan for our 2-year-old: $9,686
Retirement investments: $140,000
Old car, jeep, and motorcycle
Some equity in two different homes

DEBTS
Condo mortgage: $63,389 of $160,000 remaining since purchased in 2007
Townhouse mortgage: $323,569 of $348,000 remaining since purchased in 2016

NET WORTH: INCREASED $215,000 DURING 2017 (?????)
According to Mint, our net worth was $122,000 in January and reached $337,000 by December, for an increase of $215,000 over 12 months.

SAVINGS RATE: 43%

Savings/investments of $76,439 ($30,500 into retirement, $3,650 into a college savings plan, $19,533 extra towards the mortgage, and $22,576 into a boring old savings account) divided by a take home pay of $179,157 (gross income minus taxes, business expenses, and healthcare) = 43%.

In 2018, I’m estimating that we’ll hit a savings rate around 54%.

WHAT’S IN STORE FOR 2018: THE CONDO COUNTDOWN!

1) We’re going to bust our butts and pay the remaining $63,389 mortgage for our rental condo. After listening to ten gazillion hours of Dave Ramsey’s podcasts (yes, his energy is that addictive), we decided to go hardcore and pay the sucker off once and for all.

2) Continue saving $30,000/year towards retirement. My self-employment income fluctuates A LOT–from a low of $3,000 one month in 2017 to a high of $43,000 another month in 2017. (I do roughly the same amount of work each month, but I can’t predict when clients will actually send the checks.) I brought in $208,000 in 2017 and I’m estimating that I’ll bring in at least $175,000 in 2018. If I make it to $175,000, then we can pay off the $63,000 condo AND invest $30,000 towards retirement.

3) Spend down our bloated savings account from $100,000+ to around $50,000 by transferring this money into the condo’s mortgage or into retirement savings. I need to let goooooooo and stop hoarding so much cash that only gains pennies in interest.

4) Use debit cards and cash. No more using credit cards like debit cards. A few studies have found that we spend more–up to 130% more–when we swipe our credit cards instead of using cash or debit.

5) Trim the budget. We’re not buying alcohol, coffee creamer, vacations, weekend trips, or new clothes until the condo’s paid off. We’re also working on meal planning to shrink our grocery bill. I’m not a cook so it’s actually been pretty hard to find recipes that are budget-friendly, waist-friendly, and freeze-and-reheat-for-lunch friendly. Mr. Fi365 is literally exploring Budget Bytes as I write.

6) Choose a financial focus for 2019. Will we go hardcore on our townhouse’s mortgage? Will we go hardcore on our retirement savings? Will we (I) get nervous and hoard money in the savings account again? Will we blow everything and have to start over from square one? All of the above?

VIEW (AKA STALK) OUR SPREADSHEET AND HELP US IMPROVE!

More details in a blog post here: https://fi365.wordpress.com/2017/12/31/2017-report/

And here’s our detailed budget if you want to see how a minimalist, semi-frugal family making $285,000 spends their money: https://docs.google.com/spreadsheets/d/1oDfc1-QBNuoO84IO7XaXZe9SIa1llUcZJiJ-tQRkGdQ/edit?usp=sharing

 

Cheers to getting one step closer to financial independence in 2018!

–Mrs. Fi365

The steps we're taking 365 days a year to reach financial independence by… 45? 40? https://fi365.wordpress.com/

ysette9

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Re: Case Study - Peek inside our $285k budget & laugh at our novice $ skills
« Reply #1 on: January 01, 2018, 07:41:20 PM »
Welcome and good luck! Around these parts the general consensus is that unless your mortgage interest rate is something like 7%, you are better off kit pre-paying it and investing the money instead. If you would otherwise keep the cash in a boring savings account then you would get a better bang for your buck paying it off. There is nothing wrong with laying off the mortgage early and there is a psychological component to it that some peoplemfacoe, but it is not the optimum use of your money.
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Fi365

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Re: Case Study - Peek inside our $285k budget & laugh at our novice $ skills
« Reply #2 on: January 02, 2018, 07:04:41 AM »
We've thought so long and hard about paying off mortgages...

Our rental condo has 6.25% interest so the math sort-of supports paying it off, but we've decided that it comes down to the psychological benefit of not having an expense hanging over our heads anymore.

When we hit FI, we think that the husband will keep working (relaxed government job, great benefits, pension, close to our house, etc.) but that I'll cut waaaaaay back to have more mommy time with the kid(s). At this point, I can't mentally justify stopping working while we still have bills of any kind, so we're hoping to have both mortgages paid off around the same time that we hit $1,000,000 in investments. $1,000,000 is an arbitrary number and is actually more than we'll need once our mortgages are paid off and our kid(s) are out of daycare. I think we'll hit those mortgage and investment milestones in ~8 years, around age 40. The exact math is tricky because my self-employment income varies from year to year.

Anyway, long story short---once we finish paying off our rental condo during 2018, I think we're going to turn our focus towards investments (rather than paying off the townhouse that we live in). We might put a little extra towards the mortgage, maybe $1,000/month, but the primary primary focus will probably be retirement savings. TBD though.. that's what 2018 is for! To learn as much as possible from everyone here and figure out our plan for 2019.

Thank you for your input!!!!

The steps we're taking 365 days a year to reach financial independence by… 45? 40? https://fi365.wordpress.com/

YoungGranny

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Re: Case Study - Peek inside our $285k budget & laugh at our novice $ skills
« Reply #3 on: January 05, 2018, 07:03:16 AM »
Looks like you are already planning on making some cuts to your budget in 2018. One area that jumps out is having 2 cars + a motorcycle. Could you sell the motorcycle? It would give you an asset to invest immediately versus paying on something.

 There were other things here and there that definitely added up $1000 for clothes for the year, $165 for make-up etc, $600 for husbands lunches etc. The point isn't to make yourself miserable and you guys make enough that if you're comfortable with that level of spending you'll still be able to achieve early retirement. The point is to view the opportunity cost. The few things I mentioned above mean you'll need an extra $44k in your 'stache before you can pull the plug. It's helped me to curb my spending on various items when I think of it that way and usually after a bit I don't even miss it. In rare instances that I cut spending on something and find that I miss the luxury, I simply add it back in.

freya

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Re: Case Study - Peek inside our $285k budget & laugh at our novice $ skills
« Reply #4 on: January 05, 2018, 07:50:40 AM »
Wow, what a great story!

I think I'd focus on the large potatoes first - and there are many of them here.  You need to take steps first to reduce your tax bill, and that should be prioritized over mortgage prepayment.  And, if the rental condo is part of your business plan, then count it as a business asset and not a personal one.  Are you sure that it makes sense to pay off the condo after taking the taxes into account?

A few suggestions - and do run these by an accountant, as I'm not one and am in no position technically to give advice:

1. Open a Keogh/solo 401K plan, and make "profit sharing" contributions.  This can be up to 20% of business net income, before making standard 401K contributions.  While you're at it, roll any deductible IRA money you have lying around into the Keogh.

2. Maximize 401K contributions for yourself and husband.  You should be contributing $36,000/year, not $30,000.  If your husband has access to a 457 plan, max that out too (another $18K).

3. Unless your husband has gold-plated government health insurance, switch to a high deductible plan and contribute the maximum to an HSA.  This is tax free going in AND coming out, which makes it the best deal in town.  The tax benefit plus reduced premiums will most likely more than offset the deductible.

4.  Make back-door Roth contributions every year, starting with 2017 (you can make the nondeductible IRA contribution up until April 15).   This is why you want a solo 401K and not an IRA for retirement contributions from the self-employment income.

5. Keep the cash for an emergency fund, as it's about 12 months expenses.  You might want to use part of it to buy I Bonds at Treasury Direct.  The interest is tax deferred for 30 years, and you can buy up to $20K/year ($10K for each of you).

Also realize that you are exactly in the right position to benefit handsomely from the new tax system.  Your business income will get a 20% deduction off the top!

With those changes, you should be able to punch up your savings rate significantly.  After you've done these things then you can think about mortgage prepayment.

Good luck and have fun!!!

neo von retorch

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Re: Case Study - Peek inside our $285k budget & laugh at our novice $ skills
« Reply #5 on: January 05, 2018, 07:53:36 AM »
Our rental condo has 6.25% interest so the math sort-of supports paying it off, but we've decided that it comes down to the psychological benefit of not having an expense hanging over our heads anymore.

Of course it's a personal decision. This particular line of thought never made any sense to me.

For example, my housing costs are:
 - principal (~$1100)
 - interest (~$900)
 - taxes (~$500)
 - insurance (~$65)
 - utilities (~$200)
Total: $2765 $1665

Of that, "principal" isn't an expense. It's a transfer of value from cash to real estate ownership. The rest are things I have to pay either way. So it's just that interest payment that goes away if I pay off my mortgage. But... while I refrain from paying off a $300k mortgage, a $300k investment has an interest payment... to me... for $2k/month. So having that one expense of mortgage interest hanging over my head doesn't bother me. The other 4+ costs will still be there.

Anyway, sorry to go off on that tangent! :) Our family is also high-earning, high-spending, and as long as I've been thinking about being smart with money, and reading MMM, I'm still halfway terrible at it. High-earning makes it easier to make mistakes... so I hope to continue learning and improve upon the things I've done before. I'm sure you will do great!

Fi365

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Re: Case Study - Peek inside our $285k budget & laugh at our novice $ skills
« Reply #6 on: January 05, 2018, 09:02:55 AM »
THANK YOU!!!!

I'm good at the "increase income" side of the equation and we've been steadily improving the "decrease expenses" side over the past few years. But you nailed it--I'm just now realizing that the tax strategy side is where we need to focus our energy. The husband can make all the budget-friendly meals he wants, and I can make all the money I want, but neither of these efforts matter if we're losing too much to taxes.

The husband works for the Federal government so I imagine that he's eligible for a 457 Plan (?). I just texted him--none of his coworkers have heard of it. But, these are the same guys who have credit card debt and use all their money to buy cars, motorcycles, RVs, and cruises to Mexico, aka normal Americans. Or maybe 457 Plans are through Vanguard/Voya/etc. and not through the Federal agency he works for? Hmm. (Trying to be transparent about my newbie knowledge.)

I'm also fairly new to the backdoor Roth concept. One of my biggest questions was whether we should do this now or wait until (if?) we want to stop working. It sounds like we should be doing it now. Thanks!!

I wonder if I can open both a solo 401k and a SEP IRA? Off to investigate...

We've gone back and forth on the pay-off-the-condo decision for YEARS. That's why our boring old savings account has grown unnecessarily high. We simply didn't know what to do with that money, so we did nothing. The husband--a reluctant saver and investor--is totally fired up about paying it off and is taking on side jobs, extra hours, spending less, etc. to make it happen. The behavioral benefits of having a goal to work towards might outweigh the math benefits for us. Darn. I'm still wavering on this decision though. We're fairly certain that we're not going to pay an extra penny towards our townhouse's mortgage. If/when we decide to stop working, we're going to move from Virginia to Utah/Colorado/Montana and we'd sell the townhouse anyway and move into something cheaper.

To be continued. Your comments are priceless. Thank you!
The steps we're taking 365 days a year to reach financial independence by… 45? 40? https://fi365.wordpress.com/

neverrun

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Re: Case Study - Peek inside our $285k budget & laugh at our novice $ skills
« Reply #7 on: January 05, 2018, 09:26:29 AM »
THANK YOU!!!!

I'm good at the "increase income" side of the equation and we've been steadily improving the "decrease expenses" side over the past few years. But you nailed it--I'm just now realizing that the tax strategy side is where we need to focus our energy. The husband can make all the budget-friendly meals he wants, and I can make all the money I want, but neither of these efforts matter if we're losing too much to taxes.

The husband works for the Federal government so I imagine that he's eligible for a 457 Plan (?). I just texted him--none of his coworkers have heard of it. But, these are the same guys who have credit card debt and use all their money to buy cars, motorcycles, RVs, and cruises to Mexico, aka normal Americans. Or maybe 457 Plans are through Vanguard/Voya/etc. and not through the Federal agency he works for? Hmm. (Trying to be transparent about my newbie knowledge.)

I'm also fairly new to the backdoor Roth concept. One of my biggest questions was whether we should do this now or wait until (if?) we want to stop working. It sounds like we should be doing it now. Thanks!!

I wonder if I can open both a solo 401k and a SEP IRA? Off to investigate...

We've gone back and forth on the pay-off-the-condo decision for YEARS. That's why our boring old savings account has grown unnecessarily high. We simply didn't know what to do with that money, so we did nothing. The husband--a reluctant saver and investor--is totally fired up about paying it off and is taking on side jobs, extra hours, spending less, etc. to make it happen. The behavioral benefits of having a goal to work towards might outweigh the math benefits for us. Darn. I'm still wavering on this decision though. We're fairly certain that we're not going to pay an extra penny towards our townhouse's mortgage. If/when we decide to stop working, we're going to move from Virginia to Utah/Colorado/Montana and we'd sell the townhouse anyway and move into something cheaper.

To be continued. Your comments are priceless. Thank you!

No 457 plan, TSP is basically the FEDs 401k, make sure he is contributing the $18,500 to this.  If his check comes from NFC it is $686 per check for 2018 because there are 27 paychecks this year.

For health care.  Next November/December during open season you can switch to GEHB's HDHP plan,  $136 a pay period with $1,500 passed though annually to the HDHP.  (At HSAbank)

Here are a couple of Fed related retirement threads:

https://forum.mrmoneymustache.com/post-fire/any-fers-tsp-fire-folks-out-there/

https://forum.mrmoneymustache.com/welcome-to-the-forum/tsp-participants/

ETA:  The TSP website and Facebook page have some pretty decent info on the program.
« Last Edit: January 05, 2018, 09:31:08 AM by neverrun »

ShoulderThingThatGoesUp

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Re: Case Study - Peek inside our $285k budget & laugh at our novice $ skills
« Reply #8 on: January 05, 2018, 09:48:42 AM »
Are you sure you're making enough money on this condo that you shouldn't sell it and invest the proceeds somewhere that will make more money? There's a sell/rent Case Study setup in the real estate section that many people with rentals have found illuminating.

Laura33

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Re: Case Study - Peek inside our $285k budget & laugh at our novice $ skills
« Reply #9 on: January 05, 2018, 11:23:04 AM »
I'm also fairly new to the backdoor Roth concept. One of my biggest questions was whether we should do this now or wait until (if?) we want to stop working. It sounds like we should be doing it now. Thanks!!

FWIW, you want to do the backdoor Roth as early as possible, because then the money has more time to grow tax-free.  But I think you may be confusing two concepts.  The so-called backdoor Roth is when you open up a nondeductible tIRA up to the annual limit ($5500, I think), and then convert that immediately into a Roth.  Because you do not deduct the tIRA contributions, you pay tax only on the gains in the account between when you opened it and switched it to the Roth; so if you convert it quickly, you will have little to no gains and so pay little to no taxes.  You do this when, like you guys, you make too much income to be allowed to contribute directly to a tIRA or Roth, and you do it every year to take advantage of the tax-sheltered IRA space.

The other kind of IRA-to-Roth change is when you take an existing deductible tIRA (or 401(k) that you roll over into a tIRA) and convert all or part of it to a Roth.  This is not subject to that $5500 annual limit, because you're talking about converting your existing IRA, not making new contributions.  In this case, though, because you took a tax deduction for your contributions, you pay taxes at your normal income tax rates on the entire amount converted.  This is the kind of change that people generally wait until retirement to make, because the amount you convert in any year counts as income, so why do that when you're already in a high tax bracket and those conversions will be taxed at a high marginal rate?  Instead, you want to start after you retire and drop into a low tax bracket, and then spread out the conversions over several years to stay within that lower bracket. 

The one big asterisk on all of this is if you have an existing deductible tIRA -- then, if you are trying to do the backdoor Roth, the IRS won't let you just take the new nondeductible contributions and convert them and leave all of the deductible IRA money there.  The IRS treats all of your IRA monies as coming from one pot, so if part of that pot is deductible and part is nondeductible, the IRS will treat the conversion as coming from the deductible/nondeductible components proportionately (e.g., if 10% of your total amount in your IRA is nondeductible and 90% is deductible, the IRS will treat 10% of your Roth conversion as coming from the nondeductible part (paragraph 1, taxes only on gains) and 90% as coming from the deductible part (paragraph 2, taxes on the entire amount converted).  You want to avoid that tax hit if possible, so if you have an existing IRA and want to start doing backdoor Roths every year, you will want to see if you can roll your existing deductible tIRA monies into a 401(k) or similar -- once the money is out of the IRA, then you have a clean slate to set up the nondeductible IRA and then convert it to a Roth without paying all those taxes.
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